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strategy

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“Strategic Thinking” – The Meaning Behind the Buzzword

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It sounds easy: my client wanted to think more strategically. isn’t that the hot buzzword? “Strategic thinking.” Oooh! Sexy. There’s only one problem: what, exactly, does it mean?

You’d think we would know. But I’ve seen executive teams discuss in all seriousness what the lever does on a piece of machinery. That’s about as non-strategic as it gets. In fact, a general rule is that if you read it in a manual, it’s quite likely not strategic.

What is strategic is when you’re doing something that changes the structure of the business in some basic way. Paint a machine lever red? Not strategic. Decide to outsource manufacturing to China? Strategic, because it changes who you hire, how you manage them, and what they’re capable of achieving. You punt your machines and take on eager young managers who speak Mandarin.

This is the first kind of strategic impact: changing organization structure. This includes outsourcing, selecting vendors (since what you can do now becomes expanded and limited by what they can do), mergers and acquisitions, changing the org chart, going public, and hiring and firing people who will in turn make strategic decisions.

Or consider an entrepreneurial client who insists on answering the phones himself. He’s done it since founding the business 20 years ago and prides himself on knowing everything that’s going on. But now that the company gets a hundred phone calls a day, he decides to install an automated attendant, freeing himself to do other things. This is an example of “business process reengineering,” which is a fancy way of saying “doing things differently.” Changing how a business does something is strategic because different hows give the business different capabilities. If your product is produced on a machine that turns out 100 widgets a day, then you simply can’t bid on a job that wants 500 units by tomorrow. If you can rearrange your factory processes and produce 5,000 units a day, whole new markets open up.

Speaking of markets, choosing the markets to compete in, what to sell, and how to price are all strategic decisions. After all, those decisions determine who you’ll hire, how you set up your org structure, and how you’ll deliver your product or service.

The American Express web site lists 20+ cards. I called a friend in Amex’s strategy group to help me understand the difference between the “Platinum Business” and the “Business Platinum” cards. He said, “I work in strategy. I don’t really know our product lines.” A strategy group that doesn’t know the products? I don’t know what they do, but it seems awfully dangerous to be making organization structure and process decisions without even knowing what your customers are buying.

Everything we’ve discussed so far is cross-functional; they can involve changes that affect many parts of a business. Though it’s possible to make strategic decisions in one area of a company without involving other areas, that’s a dangerous game. If our marketing department starts competing in a new market that cares about delivery time, but doesn’t tell our shipping folks, they can set the company up for failure.

Don’t make the same mistake. Learn when your decisions are strategic.
That means decisions about org structure, process–the HOW–, cross-functional decisions, and the marketing decisions of what to sell and who to sell them to.

If you want to learn more about strategy, my very favorite book is Co-opetition by Adam Brandenburger and Barry Nalebuff. I also liked Geoff Moore’s “Crossing the Chasm.” Both books are circa mid-90s. There are 83,416 other business books that will teach you some kind of strategic thinking. I’m not sure the specific strategic approach is very important (though consulting firms will make big bucks telling you otherwise); to me, the value comes from learning to think at a strategic level consistently and integrate strategic thinking into your daily running of the business.

Is The Marketplace of Ideas Turning Into a Swamp?

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We take it for granted that making things easier is always a good thing. I disagree. Sometimes it is, while sometimes it isn’t. Today, I’ve been contemplating the case where maybe it’s good to make things harder.

Technology has made it so that anyone can produce music or publish books. This is a very good thing, in that it means people driven by the desire to do those things can now do them far more economically. But there’s a downside to technology that enables: it drives the supply of those goods up, without necessarily driving demand up. More supply without more demand means prices will fall. In both arenas—neither of which have been famous for paying creators very much money—we’re seeing so much content being created that it’s hard for anyone to make a living anymore. The very few who manage to rise above the fray capture most of the money, and everyone else has to work as a waiter to get by.

In some abstract way, this may be good for the consumer by giving the consumer more choice (though the book The Paradox of Choice discusses about a dozen reasons why more choice is not necessarily good). But there’s now so much noise in the market that matching that consumer with the perfect author/musician is harder than ever. Unless the musician/author is one of the winners with a huge marketing budget, the consumers will never find them.

There may actually be benefits to markets that are somewhat harder to enter. Fewer players enter, but the ones who do can make enough money to make a living, and the number of entrants is low enough that consumers can at least have a decent shot at discovering the product that’s best for them.

Sad for T-Mobile

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I just visited T-Mobile.com and saw their big ad, emphasizing the amazingness of their 4G network. They haven’t yet realized that people are no longer buying cell phone service. People are now buying a platform and functionality, which happens to run on top of cell phone service. Super-fast streaming does me no good if I can’t super-fast-stream the tools I need/want to keep my life going.

Maybe most people think of their cell phones merely as media, entertainment devices, but I think that’s too simplistic. A vast number of us think of our cell phones as adjuncts to how we do business. I tried the MyTouch 4G from T-Mobile and returned it, because it was hyper-optimized for Facebook, tweeting and texting and watching YouTube. But could it handle a to-do list or a memo pad? Nah. They hadn’t thought to include that. (After 9 hours of downloading Android apps to handle that functionality and not finding a single app that did everything I wanted and was also pleasant to use, I finally gave up.)

Get with the program T-Mobile: the platform is now what matters. The game has changed. Rather than just OEMing Android and the phone hardware, take a good look at how people use their smartphones. Don’t just read the hype. Watch people. Watch teenagers. Watch parents. Watch businesspeople. Then make sure your entire phone experience supports those people’s ability to get their work done.

If you can get the iPhone, do it, and do it as fast as you possibly can. Many people are more loyal to the platform than the carrier, and if you can handle the capacity issues, providing the iPhone with your excellent service will be a big win in the marketplace.

If you elect to stay Android-only, look much closer and more deeply at how people use their phones. Don’t be afraid to hire a team of programmers and have them do as much customization as it takes to produce something both functional and usable. That’s not easy, but it’s doable. You just need to know that’s your goal going in.

Good luck. My contract ended last month, so now I’m free to switch carriers with no penalty. I can buy a Canadian unlocked iPhone and manually trim my existing SIM card to fit, but that will cost me an extra $1,000. Or I can switch to AT&T or Verizon. Or, I’m willing to wait for you to get the iPhone. But not forever…

Look out Comcast: Apple soon to disrupt cable industry!

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Today at the WWDC, Steve Jobs announced the latest innovation from Apple: the untethered video Pod (vPod). Even as the iPod turned the world of MP3 players on its head, and the iPhone reshaped the cellular landscape, the vPod is poised to be a disruptive force for the entire cable industry.

This revolutionary new idea takes streaming video to a whole new level. The video display device receives video real-time and displays it smoothly, entirely without wires or any kind of physical connection. Though Jobs did not confirm some of the sexier rumors surrounding the device, a knowledgable source from inside Apple suggests that the vPod will require no monthly subscription, and will be able to receive its videos directly, for free, from transmitting stations at key locations in major urban areas.

Google CEO Eric Schmidt enthusiastically showed Google’s commitment to the idea of untethered access, with the introduction of Multi-Access Portraits, a version of Google Maps that operates without the need for an internet connection. “We take not only the streets you’re interested in, but also all surrounding streets and display them on a single large sheet of pressed cellulose pulp,” Schmidt explained. “You can take the M.A.P. with you anywhere, even when internet connectivity is unavailable. By visually inspecting the M.A.P., you can determine the sequence of right and left turns needed to travel between two points without the aid of a trillion-dollar network and multi-million dollar physical infrastructure.” Showing their commitment to providing users with a comprehensive selection of choices, the M.A.P. can be folder up to 16,000 different ways to fit neatly into a rear pant pocket.

When asked for their opinion of the new technology, Microsoft commented, “We are listening to our customers. They say they want a product with fewer bugs that’s easier to use.” Their competing product is projected to be released within a mere sixteen months of Apple’s product. It is a cable-tethered television system, but, as they are quick to point out, with a cable that is .001% narrower than before. “This system is virtually cable-less. It represents a revolutionary new diameter, heralding the coming of a whole new age of technology,” proclaimed Steve Balmer, Microsoft CEO, “People want the same thing as ever, only better.”

A new entrant into the PDA market, a U.K.-based company that processes trees, is entering the PDA market with their own liberating device. “Our PDA requires neither batteries nor an A/C adapter,” they explained. “It has perfect handwriting recognition, infinite resolution, millions of colors, can mix text and graphics trivially, and is easily carried in a pocket.” The product, code-named Moleskin, is due out in Q3 2011.

Negotiating equity with a co-founder.

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A student entrepreneur wrote and asked how he should negotiate with his company co-founder, a Professor, for equity. The Professor has proposed the the student get almost nothing, and the Professor get the bulk of the equity. Here’s my response to the student.

Negotiating around equity is tricky. There are conventions, but at the end of the day, it really comes down to nothing more than the ability to conversationally create huge perceived value and then use that as a negotiating leverage.

Check out this article I wrote on the topic: https://www.steverrobbins.com/articles/equitydistrib.htm

The book Co-opetition defines your “value-added” in a negotiation as the value-of-the-deal-with-you-in-it minus the value-of-the-deal-without-you. Once you know your value added, it can help with negotiation. Let’s say you and a friend are starting a business and neither of you can be replaced. With both of you present, the business is worth $100. If either of you leaves, the business is worth $0, so you each have a value added of $100, which gives you symmetric bargaining power.

Let’s change the situation a bit. Let’s say that you have special technology without which the startup won’t work. He’s bringing valuable sales skills, but if he were to drop out, you could find someone else who could do sales, but let’s say it would take enough time and money that you’d have to spend $5 replacing him. (Thus, the value of the business without him would be $100-$5, since you spent $5 on a Craigslist ad to replace him.) Your value added is $100 – $0 = $100. His value added is $100 – ($100- $5) = $5.

In this scenario, you have considerably more bargaining power than he does. Note that having the bargaining power doesn’t mean you can or should get that proportion of the total pie, just that you have that relative strength of bargaining power.

I wouldn’t actually try to do specific numeric calculations. But do think about what you bring to the table that would be hard to replace, and use those as your disucssion points. There may be many things you bring to the table that justify a request for equity:

  • If you helped originate the idea.
  • If you plan to take lower wages or work longer hours that would be expected solely from your salary.
  • If you’re the only one who can do the work.
  • If you bring any unique resources or connections to the table.
  • If you put in initial cash to get it off the ground.

The truth about book tours

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I’ve been heartened and flattered by the many requests to tell people when my book tour will take me to their city.

Help me find a way to make it possible!

It turns out that in this day and age, unless you’re a celebrity, book tours are little but an excuse for an author to pay to travel around and indulge themselves in an appearance here and there.

read more…

What is a Business Model? The anatomy of how a business makes money

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Note: This article was written several years ago, when PayPal.com was a humble startup, Eudora Pro was still a leading desktop e-mail client, and cameras still used film.

Q: Many people say that they want to see your business model. What exactly do they mean by that? Do they want to know your target market and strategy, or do they need financial information as well?

A: A business model is quite simple: it is a brief statement of how an idea actually becomes a business that makes money. It tells who pays, how much, and how often. The same product or service may be brought to market with several business models.

Here are several sample real-world scenes, showing how similar products can have very different business models.

Consumer Reports vs. TIME Magazine

Consumer Reports makes money solely from grants and subscribers . It has a subscription-based business model.

TIME makes money both from subscribers and from advertisers. It has more of an advertising-based business model.

The difference in business models tells you a lot about the two businesses. Consumer Reports is going to concentrate on selecting content which will be of high enough value that people are willing to pay a subscription fee. Since it doesn’t depend on ads for income, no one but the editorial staff influences the articles.

TIME Magazine, on the other hand, also must take advertisers into account. TIME needs content for its readers, but it is largely concerned with growing a demographic for the advertising it sells. Since TIME makes most of its money from ads, an advertiser’s threat to pull advertising may put pressure on the magazine to pull or rewrite a story that the advertiser finds objectionable.

Movie Theaters

During the first several weeks of a movie’s run, almost everything in a theater’s box office goes to the film’s distributors and producers. The theater makes its money from the concession stand! The business model: sell tickets at cost, and make profit on refreshments.

This model implies that staffing the refreshment stand should be high priority. When the theater is crowded, bring in extra staff to keep refreshments flowing. Since that’s where the money is made, losing sales from too-long lines is losing the only profitable sales the theater makes.

A theater near my house rents second-run movies that have been out long enough for the theater to be able to keep most of the ticket revenue. They make much more of their money on ticket sales, and put far less emphasis on the refreshment stand.

Razors vs. Shavers

Gillette is happy to sell you their Mach III razor handle at cost, or even below cost. Because they then sell you the profitable razor cartridge refills. Again and again and again… Their business model is virtually giving away the handle and making their money from a stream of razor blade sales.

Electric shavers have a different model. They cost a lot more than the Gillette handle. They cost enough that the manufacturer makes all their money up front, rather than from the stream of blade refill sales (electric shaver blades do wear out, but it takes a much longer time).

Digital vs. Film Cameras

Traditional film cameras cost a bunch of money. And then, you buy roll after roll of film to take pictures. Then you spend even more getting the pictures developed. If you’re using a Kodak camera, Kodak film, and Kodak developing, then Kodak will be very happy. Their business model makes them money from camera sales, film sales, and processing fees.

Digital cameras eliminate film sales and processing fees. Kodak needs to find a new business model before the cameras catch on more widely. And they are working on it. They are establishing digital printing centers, where you can have your digital camera pictures printed on genuine Kodak paper. The business model that was based on film sales and processing is becoming a model based primarily on photograph printing.

paypal.com … who knows?

Sometimes a business’s business model is not obvious. The web site www.paypal.com allows you to send money to a friend via e-mail. The money is either charged to your credit card or taken in cash from your cash account at paypal.com The intriguing twist is that paypal takes no commission on the transfer.

How do they make money? What’s their business model?

I don’t know, yet. From interest, perhaps? If enough users deposit money with paypal before paying it out, they collect interest on that money until the recipient finishes the transfer. If this is their business model, then they should concentrate on increasing float: getting more interest on their money, encouraging people to fund their paypal accounts long before they will send money to friends, and encouraging people to leave the money sent to them in their account just a bit longer.

Other models they could use:

Charge a fixed transaction fee on each transaction. Resulting business goals: encourage lots of small transactions.
Charge a transaction fee that is a percentage of the transfer. Resulting business goals: encourage large transfers, since they make as much as many smaller transactions, but without the overhead of doing many transactions.
Or, since electronic funds transfers are cheaper for banks than processing check, paypal might have banks give them a percentage of the savings from doing transfers by EFT rather than by check.

Brick-and-Mortar Brokers vs. E*Trade

Traditional brokers make money by charging a commission on purchases and sales. The commission is a percentage of the transfer amount, so brokers may be happy with clients who trade infrequently, as long as they buy and sell enough at a time to generate a nice commission.

E*Trade charges a low, fixed amount per trade. Their business model is to attract high-trade-volume customers. The customers are more likely to trade often when commissions are fixed and low, and E*Trade is pushing to make up in volume what the traditional brokers make by charging a percentage.

Adware: take your choice

First pioneered in the late 1990s by Qualcomm’s e-mail program Eudora Pro, some software lets the customer choose the business model! A customer can install and use the software for free, and ads will be shown as they use the program. Or, they can pay full price and install the program without the ads.

For users who elect ads, the business model is that Qualcomm provides software for free to build an audience, and then gets income from advertising. They must spend their time selling ads and distributing their software widely to create the audience.

For users who pay for the program, the business model is the same as for any shrink-wrapped software: Qualcomm gets paid up front for a product which the customer can use forever. Qualcomm then spends their time coming up with later versions which they hope will entice customers to upgrade, sending more money into Qualcomm’s coffers.

Retainer vs. Hourly Consulting

Some freelancers charge by the hour for services delivered. Others charge a flat fee retainer which entitles a client to a certain amount of the freelancer’s time. Once again, they deliver the same service, but the different business models will result in their negotiating businesses, administering their business, and controlling costs in a very different way.